■ Philip J. Purcell III took over Morgan Stanley in May 1997, when Dean Witter, which he had led since 1982, bought Morgan Stanley Group for $10 billion. Purcell's route to the top of a major Wall Street corporation was unusual. Unlike most Wall Street chief executives, Purcell lacked experience as a trader, broker, or investment banker. In fact, he began his career as a management consultant and later a retailer before officially joining Wall Street. Purcell's career at Morgan was marked by both triumph and discontent.

In 2003, with sales of about $34.9 billion, Morgan Stanley was one of the world's top investment banks. Morgan Stanley marketed financial services through three separate units. The securities division offered traditional corporate investment banking services, such as underwriting, mergers and acquisitions assistance, full-service retail brokerage, and premium services for wealthy individuals. Its investment management unit provided both individuals and institutions with investment products and services while the credit services division oversaw its Discover credit card business through its subsidiary Discover Financial Services.

A DISARMING PERSONALITY MASKS OVERACHIEVEMENT

Despite being characterized as having an "aw-shucks" personality, Purcell was also described by his associates as being a "compulsive overachiever" (BusinessWeek, October 5, 1992). He was near the top of his class at Notre Dame. At the University of Chicago, where he earned an MBA, he was the only one out of 65 students to get an A, despite the fact that he was part of a four-person team. To prove his point, Purcell kept a diary of his team's progress; the diary emphasized Purcell's contribution and was submitted to the professor. John Jeuck, a retired University of Chicago business professor, recalled, "Basically, the process was managed so that the group's resentment was channeled toward me and not Purcell. I figured he'd be a success. In my 50 years of teaching, Purcell stood out among a lot of bodies and a lot of heads" (USA Today, February 6, 1997).

Purcell attended the London School of Economics, where he earned a master's degree. At age 27 he became McKinsey's youngest principal director and the firm's youngest managing director soon after at age 32. One of his biggest clients was Sears, Roebuck and Company. After developing a working relationship with Edward R. Telling, then chairman of Sears, Purcell left his consulting position in 1978 to take a job as a strategic planner for the retailer.

SOCKS AND STOCKS

At Sears, Purcell took the retailer into uncharted territories, planning the purchases of Dean Witter Reynolds and Coldwell Banker, a real estate company. At the time his strategy to sell stocks alongside clothes was referred to mockingly as "socks and stocks." For Purcell, such skepticism was only further motivation. Said Purcell, "It scares me to death if people applaud what you do" (Salt Lake Tribune, October 30, 1998).

Sears gave Purcell the responsibility of integrating Dean Witter Reynolds, naming Purcell president and COO of the brokerage in 1982 and chairman and CEO in 1986. At Dean Witter, Purcell launched the Discover credit card—the first card with no annual fee and a rebate based on purchases—when just about everyone in the industry warned him it would fail. At first, it seemed it would. In the first two years, the card, which cost Sears $1 billion, lost an estimated $250 million. But by the time Purcell was done, Discover had 39 million customers with unpaid balances of $32 billion—generating an annual $500 million annually. Purcell remarked, "I never questioned the strategy, but there were lots who did—including at the time people I worked for" (Salt Lake Tribune, October 30, 1998).

Purcell gained experience in operating a financial services firm that would later prepare him for Wall Street.

Sears decided to focus on its retail business and spun off Dean Witter in 1993, taking it public through an initial public offering (IPO) underwritten by Morgan Stanley. In the period after the IPO, the company outperformed its peers. By 1997 its sales force included 8,406 brokers and ranked third after Merrill Lynch and Smith Barney. In addition, the Discover Card exceeded expectations.

All three of the company's product lines—stock brokerage, mutual funds, and credit cards—had generated high profit margins. In fact, in 1997 the company had a pretax margin of 15 percent, the highest in the business. By the end of the decade, Dean Witter had earned a reputation as one of the most profitable Wall Street brokerages. Said Thomas P. Facciola, an analyst with Salomon Brothers, "Dean Witter is one of the best run retail brokerage shops in the country. They have a good cost culture, and they don't get carried away with a bull market" (New York Times, February 6, 1997).

A WALL STREET ANOMALY

As head of Dean Witter, Purcell was described as a low-profile player who was an outsider on Wall Street. Unlike industry peers who started as traders, brokers, or investment bankers, Purcell's roots were in the consulting business. James F. Higgins, who ran Dean Witter's brokerage operation under Purcell, noted that "Phil is different. He didn't claw his way up the Wall Street ladder" (New York Times, March 2, 2003).

Another stark difference was that Purcell was a staunch believer in pay for performance, taking a relatively modest package in 1995 of a $3.5 million base with stock options that paid only if the company succeeded. Jack Keane, dean of the Notre Dame College of Business Administration and a friend, spoke of Purcell's integrity: "He accomplished a great deal, while others were paying public relations firms to get their names here and there" (USA Today, February 6, 1997).

A MUTUALLY BENEFICIAL UNION

Purcell's relative anonymity came to an end in February 1997, when Dean Witter bought Morgan Stanley Group for $10 billion. In May 1997 Purcell became chairman and CEO of Morgan Stanley Dean Witter, a firm with $271 billion in assets managed and $10.6 billion in capital, at the time one of the nation's largest securities companies. It was a mutually beneficial match. Dean Witter's brokers received the additional products they needed to sell to their middle-class customers, and Morgan Stanley broadened its customer group beyond the corporate market to individual investors.

The deal was the by-product of strong relationships between the three executives integral to the deal: Purcell; John J. Mack, Morgan's president; and Richard B. Fisher, Morgan's chairman and chief executive. In fact, both Purcell and Mack wanted to run the newly combined firm, but a sacrifice on the part of one of the executives led to a truce. Fisher recalled, "We talked about it a lot, and John just came in one morning and said that this was so powerful a combination that he would take the second slot" (New York Times, February 9, 1997).

During this period, Purcell's challenge was creating cohesiveness out of two distinct corporate cultures. He moved slowly at first, allowing each entity to operate separately.

A MERGER HITS SOME SPEED BUMPS

The first year of the merger was a success. But in the summer of 1998, Purcell faced several challenges. For starters, Mack was angling for more power. Encouraged by a trend in the financial services industry in which top executives were sharing power in co-CEO roles, Mack approached Purcell with a similar proposal. He had a good case; after all, Mack's employees were generating revenues and earnings much faster than the Dean Witter retail businesses.

Purcell's initial reaction was not positive, but he agreed to give the suggestion some thought—if his competitors were so eager to embrace the move, Purcell concluded, maybe the structure could work. But Purcell ultimately rejected the idea, and once again, Mack backed down.

WOUNDS NEED HEALING

An even costlier issue was the frustration felt by the Morgan camp about the slow pace of integrating operations. None of Morgan Stanley's senior executives were invited to be part of the new firm's operating committee in the first year of the merger. After Mack aired the concerns to Purcell, the two executives consolidated the company's fixed-income trading operations. In a major concession, Purcell also invited some of the old Morgan Stanley executives who were heading some of the most profitable business units into the company's management committee. The new management committee was also brought together for a group therapy session.

According to the rules, members of the committee were not allowed to bring up any issue in the future that had not been aired at the meeting. Sir David Walker, a British committee member, recalled, "There was something very American about it, and even a religious fervor. I squirmed some. But it was steam-letting, and I have to say that I think in the end it was cathartic" (Fortune, April 26, 1999).

Morgan Stanley finished 1998 on a positive note. It generated $3.3 billion in 1998 profits—more than double Merrill Lynch's $1.3 billion. Assets under management increased from $338 billion in 1997 to $462 billion in 1999. Purcell and Mack called the merger a "home run," with Dean Witter's retail brokers aggressively marketing Morgan Stanley's portfolio of corporate financial services (Fortune, April 26, 1999). Their next goal was exporting their offerings overseas and finding a way to integrate the Internet into their brokerage operations without making the company's brokers obsolete.

A POWER STRUGGLE COMES TO AN END

However, by January 2001 Mack had finally grown tired of not running his own operation and announced that he was quitting. His departure greatly influenced the path of Morgan Stanley. Richard K. Strauss, a securities industry analyst at Goldman Sachs, said that had Mack stayed with the firm, it "would have focused more on corporate and investment banking" (BusinessWeek, June 25, 2001).

But with Mack out of the picture, Purcell embraced a strategy to strengthen credit cards, retail, and asset management. He also crafted a plan to break down the walls between company divisions and provide clients with a complete portfolio of financial services. Instead of the traditional practice of linking compensation to the dollar amounts of transactions, he implemented new rules that tied pay to the company's share of the total business each client gave to Wall Street. Purcell also appointed a team of newly promoted younger employees to strategize a better way to service corporate clients. Purcell said, "Easily the most important thing I've done is pick people" (BusinessWeek, June 25, 2001).

An important win showcasing Purcell's strategy was the $3.6 billion spin-off of Agere Systems, the optical electronics unit of Lucent Technologies. Although Morgan declined to comment on its fees for directing the deal—at the time the fourth-largest IPO in U.S. history—Goldman Sachs estimated that it received $75 million. John T. Dickson, then president and CEO of Agere, remarked, "Like most people, I'm skeptical of bankers. In this instance, they earned the money" (BusinessWeek, June 25, 2001). Even competitors were impressed. A top banker at a rival firm noted, "A lot of firms probably could not have pulled that deal off" (BusinessWeek, June 25, 2001).

PLAGUED BY CONTROVERSY

Despite his financial performance, the low-key Purcell struggled in the public perception arena—both inside and outside his firm. Key executives departed the firm. With Mack gone, the investment bankers at the firm who remained felt that they commanded little respect. Said a Morgan Stanley banker, who remained anonymous, "No one on the institutional side would think to leave if Purcell left. In fact, they'd probably have a party" (BusinessWeek, June 25, 2001).

Morale was further deteriorated by two scandals. The first involved a junior analyst at the firm who filed a $1.78 billion discrimination suit after he was fired for appearing nude in a gay magazine. Morgan settled the suit, making a $1 million donation to the National Urban League. The company insisted that the analyst who brought the suit did not get any money in the settlement, but the press expressed skepticism. One columnist with the Wall Street Journal even suggested that Morgan lied about the settlement.

The second controversy mounted when the company paid Bill Clinton $100,000 for a speech. Investors expressed dissatisfaction with the decision, and Purcell apologized, angering some in his ranks. The executive responsible for hiring Clinton later left the firm.

A PARAGON OF MISCONDUCT?

In addition to suffering with the rest of Wall Street through a stiff market decline in 2001, Morgan faced a slew of challenges in the new millennium. Its stock price fell 66.5 percent from its peak in September 2000 to March 2003, proportionally a larger decline than for the stock prices of its competitors.

Most troubling was the intense regulatory scrutiny of Morgan's business practices. In April 2003 Morgan and 10 other large firms agreed to a $1.4 billion settlement resulting from allegations that research analysts had issued biased stock ratings to attract or retain investment-banking clients. Morgan's share of the settlement came to $125 million. Just a day after the agreement was announced, Purcell irked regulators by telling audience members at a conference that the settlement should not worry retail investors.

William Donaldson, the chairman of the Securities and Exchange Commission, responded with a terse letter, reminding Purcell that terms of the settlement prevented him from denying the allegations and scolding him for his hubris. Donaldson wrote, "First, your statements reflect a disturbing and misguided perspective on Morgan Stanley's alleged misconduct. The allegations in the commission's complaint against Morgan Stanley are extremely serious. They include charges that Morgan Stanley paid other firms to provide research coverage, compensated its research analysts, in part, based on the degree to which they helped generate investment banking business, offered research coverage by its analysts as a marketing tool to gain investment banking business and failed to establish adequate procedures to protect research analysts from conflicts of interest. In light of these charges, your reported comments evidence a troubling lack of contrition" (New York Times, May 2, 2003).

Purcell's troubles did not end there. In July 2003 the State of Massachusetts issued a complaint against Morgan Stanley, alleging that brokers and managers were paid incentives for pushing proprietary products that in some cases lagged behind their third-party peers. The charge resulted in a $50 million fine. And in a settlement with the National Association of Securities Dealers involving allegations of overcharging third-party fund vendors for shelf space, the firm paid a $2 million settlement.

In November 2003 Purcell responded to the onslaught of legal troubles by announcing at the Securities Industry Association's annual conference that he was launching an investigation into conflicts of interest. Purcell hired a former enemy—Eric Dinallo, who worked with New York State Attorney General Eliot Spitzer investigating Morgan—to lead his efforts.

PURCELL'S FUTURE UNCLEAR

Year-end results for 2003 suggested a possible turnaround at Morgan. For the fiscal year, the firm generated $3.8 billion in net income, compared with $3 billion in 2002. Pretax profits increased by 22 percent. What is more, the company claimed the number two spot in global mergers and acquisitions and the number three position in equity underwriting. In the first quarter of 2004, it beat estimates, with earnings rising by 35 percent.

Still, some wondered whether Purcell, who turned 61 in 2004, had lost his magic touch. The Wall Street analyst Richard Bov stated, "I think Morgan Stanley's ship is going up and down with the tide, as opposed to Purcell's taking control or command of business" (Primedia Insight Registered Rep., April 8, 2004). Throughout the turmoil, Purcell never gave any indication that his job was at risk, telling one reporter that he planned to stay until he was 65, or until 2008. He had reason to make the assertion: support from Morgan's board of directors was strong because the board included several members with long ties to Purcell. Two were consultants with Purcell in the 1970s; another was Purcell's former boss at Sears.

See also entries on McKinsey & Company, Inc., Morgan Stanley Group, Inc., and Sears, Roebuck and Co. in International Directory of Company Histories.

sources for further information

Boulton, Guy, "Utah Native Built Top Career in Securities," Salt Lake Tribune, October 30, 1998.

Dobrzynski, Judith H., "How a Deal Crowned a New King of Wall St.," New York Times, February 9, 1997.

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